Credit demand

Senator Long undoubtedly understood that once a provision is in the tax
code, it is likely to remain. Indeed, the EITC remained in the tax code each
subsequent year until it was made permanent in 1978. Legislation in 1978
also added a ﬂat range to the EITC’s phase-in and phaseout ranges, as
shown in ﬁgure 3.1.
5
An “advance payment” option was also added to the
credit in 1978, so that workers would be able, if they desired, to receive the
credit incrementally throughout the year.
Spending on the safety net slowed in the late 1970s and shrank in the
1980s.

Dobrinsky et al. (2001) conjecture that some specific types of soft budget constraints
in a transitional environment may emerge as a result of distortions in incentive structures. In
particular, distorted incentives may have an effect both on the determinants of credit supply
and credit demand.
2
In turn, incentive structures are a reflection of the institutional
environment and the conduct of economic policy in the broader sense. Consequently, policy
reforms and policy shocks can be expected to affect the determinants of credit flows both on
the supply and the demand side.

The paper seeks to assess how a major policy regime change – such as the introduction
of the currency board in Bulgaria – affects the flow of bank credit to the corporate sector. An
attempt is made to identify the determinants of corporate credit separately from the viewpoint
of lenders and borrowers. The estimated credit supply and credit demand equations provide
empirical evidence of important changes in microeconomic behavioral patterns which can be
associated with the policy regime change.

In this case, similarly to credit supply, we also use the lagged value of Ci but in this
case it is intended to capture habit persistence in credit demand. Admittedly, in this case the
reverse causality issue cannot be fully eliminated. YDi, IDi and IvDi are activity variables
which seek to reflect the effect on demand for external finance of a general expansion of
business activity and/or investment activity.

The specification of the credit demand equation is based on a generally defined money
demand function extended with in accordance with the conceptual approach outlined above.
The demand for credit in general, as a form of money demand, can be assumed to depend on
two main variables: the income or activity level and the cost of credit. In accordance with the
discussion in section 2.1, we augment this basic specification with variables mirroring the
adjustments in the firms’ balance sheets as well as such related to the specifics of this type of
financial flows. ...

In the last decade rating-based models have become very popular in credit risk management. These systems use the rating of a company as the decisive variable to evaluate the default risk of a bond or loan. The popularity is due to the straightforwardness of the approach, and to the upcoming new capital accord (Basel II), which allows banks to base their capital requirements on internal as well as external rating systems.

On September 15, 2008, Lehman Brothers, the fourth-largest U.S. investment
bank, filed for bankruptcy, marking the largest bankruptcy in U.S. history and
the burst of the U.S. subprime mortgage crisis. Concerns about the soundness of
U.S. credit and financial markets led to tightened global credit markets around
the world. Spreads skyrocketed. International trade plummeted by double digits,
as figure O.1 illustrates. Banks reportedly could not meet customer demand to
finance international trade operations, leaving a trade finance “gap” estimated at
around $25 billion.

While prominence in health policy greatly affects the size of the PHI market – in terms of
population coverage, contribution to health financing or scope of government interventions – there is no
necessary link between the three factors. There are sizeable PHI markets in a range of health systems with
diverse mixes of public and private financing. The size of PHI markets may also result from consumer
demand for better choice and more comprehensive cover, even where there is little stimulation through
policy levers.

To gain a better understanding of the possible role of credit in improving house-
hold food security and alleviating poverty in Malawi, in November 1994 the Inter-
national Food Policy Research Institute and the Department of Rural Development,
Bunda College of Agriculture, University of Malawi, initiated a research program on
rural financial markets and household food security in Malawi. The main objective
of the research program was to analyze the determinants of access to credit in Malawi
and its impact on farm and nonfarm income and on household food security.

We use these theoretical underpinning to specify estimable equations for the supply of
and demand for corporate credit. Since theory does not provide clues as to the possible
structural forms of these equations we basically rely on reduced forms. Data considerations, in
particular, the availability of relevant statistical data, also has played a certain role in the
specification of these equations.

CHIlD LABOR IN VIETNAM: THE RELATIVE IMPORTANCE OF POVERTY. RETURNS TO EDUCATION. LABOR MOB ILTTY. AND CREDIT CONSTRAINTS A Model of Tiebout Sorting on Exogenous Community Attributes
In this section, I build a formal model of the Tiebout sorting process described
above. As my interest is in the demand side of the market under full information, I treat the
distribution of school effectiveness as exogenous and known to all market participants.

The LIBOR is the London Interbank Offered Rate, which is used as a reference rate in loan
transactions between banks. The LIBOR floor, introduced in recent years to help enhance
bank loan yields in extremely low interest rate environments, is around 1%–2% (note that
until LIBOR reaches the “floor” level, bank loan returns do not increase with rising rates).
The credit spread is the market-determined spread paid to the investor for taking on the
credit risk (historically the normal range has been 3%–8%, depending on the riskiness of a
loan).

The strong growth of credit in both cases, however, does not mean that domestic credit was the only
source for finance of enterprises. In both cases, retained savings by the enterprises played an important
role (in China today, these retained savings are an important factor to explain the high national saving
rate). However, it can well be argued that the strong credit creation is a necessary condition for profit
growth in an economy: Only if credit creation helps to maintain a high level of aggregate demand,
firms will be able to make sufficient profits in the aggregate.

Given that the pool of underutilized labour is large in almost
all developing countries (either in the form of open unemployment or in the form of hidden
unemployment in both the agricultural and the informal sector), this then leads to an increase
in employment in the modern sector which in turn leads to more incomes and savings. The
expansion of the production of the modern sector moreover brings about the penetration of
modern technology into the economy and hence an increase in productivity and goods supply,
also adding to higher incomes.

The so called portfolio approach to credit supply (for an overview see Fase (1995))
starts with the assumption that banks maximize a utility function under a set of balance sheet
constraints which allows to derive directly credit supply functions. However, the derivation
assumes a perfect financial market while treating the private sector (comprising the corporate
and household sectors) as one homogeneous entity. These limitations restrict the use of this
model when trying to address the specific issues related to corporate finance in imperfect
markets.

Various supply and demand effects may emerge due to the existence of transition-
specific market imperfections which feature the economies undergoing transition from plan to
market. In particular, corporate financial flows are seriously affected by the existence of “soft
budget constraints”. Initially the term soft budget constraints was used by Kornai (1980) to
denote paternalistic behavior on the part of the state in the ex-post bailing out of loss-making
state-owned enterprises (SOEs) that found themselves in financial distress.

The Portfolio Review found that social funds projects that respond to
emergency situations through the rapid creation of employment oppor-
tunities are likely to achieve their objectives. The design of such social
funds projects reflects their emergency nature well. The Portfolio Re-
view did not, therefore, dwell on this cohort of social funds projects.

In total, the model can generate expected excess corporate bond returns in four ways. First,
through the dependence of credit spreads (or, equivalently, default intensities) on default-free
term structure factors. Second, because the risk of common or systematic changes in credit
spreads across firms is priced. Third, via a risk premium on firm-specific credit spread changes,
and, fourth, due to a risk premium on the default jump.
1
Empirically, we find that all these terms
contribute to the expected excess corporate bond return, except for the risk of firm-specific credit
spread changes.

If now the household starts spending some of its income (as can be expected in the real
world), we would see a further step in the income-creation: Demand for consumer goods
would increase. As long as consumer goods are produced domestically and firms can expand
their production, this would lead to a further increase in domestic employment, further
increasing aggregate income. However, as households save part of their income, also
aggregate saving increases, providing the ex post finance of the initial investment.